On Monday, July 10, the Seattle City Council unanimously approved a new city income tax targeted toward Seattle’s highest-earning residents. The new tax will collect 2.25 percent on incomes above $250,000 for individuals and $500,000 for married couples filing jointly. Expectedly, the measure has received a great amount of both positive and negative feedback.

As our regular readers will know, here at HTW it is almost unheard of for us to take a strong stance on any controversial issue. By design, our material is intended to provide readers with helpful information so that they can more capably navigate the complex worlds of tax and accounting. In other words, our aim is to confer tangible benefits, not push political agendas. Consistent with this aim, we’d like to look carefully at this new city tax and provide a balanced opinion of its usefulness and likelihood of success. Whether it be upheld or struck down, our one unswerving hope is that this new tax creates a more just environment for Seattle residents of all socioeconomic backgrounds.

Intense Reactions

As mentioned, the tax has sparked intense responses on both sides of the debate. Supporters point to a number of facts which seem to bolster the tax’s desirability. Seattle imposes one of the heaviest tax burdens on low-income families in the nation; on the other end of the spectrum, high earners in Seattle enjoy one of the lightest local tax burdens. Supporters also insist that the additional funds generated by the tax are necessary to improve local conditions.

Opponents of the tax, on the other hand, have put forth several arguments against the tax. For one, they contend that this new city income tax could be a slippery slope, and if left unchecked it could lead to a statewide income tax which would affect Seattle residents of all income levels. Adversaries also argue that the city’s targeting of wealthy residents is unfairly discriminatory and is tantamount to punishing success.

It seems likely – practically certain – that the divide will persist well into the distant future. What’s also nearly certain is that opponents of the new city income tax will file a legal challenge against the measure.

Legal Objections

Opponents claim that the new tax may be undermined on several different grounds. For one, the state constitution of Washington provides that taxes must be uniform within a “class of property” to be upheld. This new income tax possibly violates this rule by selectively targeting wealthy residents. Furthermore, an active 1984 state law forbids cities from taxing net income; Washington also has a requirement that cities must receive approval from the state capital before they can impose new taxes.

At present, no one of these objections appears the most likely to be invoked. But there’s practically no room for doubt that at least one of these objections will be raised against the new tax in the near future.

Closing Thoughts

Certainly, not one of those who count themselves among Seattle’s wealthiest residents can argue against the desirability of improving local conditions and raising the living standards of Seattle’s entire population; the need to improve our city, as well as the need to address local poverty, is something all Seattle residents can agree upon. But whether this new city income tax be the proper method to address city financial issues is something which remains to be seen. On the one hand, there is no getting away from the fact that Seattle’s tax treatment of wealthy residents is comparatively very gentle; but how can proponents of the new tax be certain that changing this state of affairs won’t cause a mass of socioeconomic flight to other areas of the country? What if imposing the tax inadvertently leads to a financial situation for Seattle which is worse than it was before? Only time will provide the clarification we need.

In the first half of this last December, Governor Jay Inslee proposed a new tax plan designed to generate funding for basic education. The plan is responsive to a recent state court opinion which held that funding for K-12 education in Washington must come from the state rather than local districts. Prior to this opinion – the McCleary opinion – local districts contributed a substantial part of the cost for education through local property taxes; now, the state must foot the entire bill, and Mr. Inslee’s new plan addresses the deficit created by the removal of this familiar source of funds.

Mr. Inslee’s plan would draw tax revenue from several sources. Let’s review these sources and then take a look at the political reaction to his proposal.

Revenue Sources

The tax plan of Mr. Inslee would draw revenue from four sources. The plan would implement a capital gains tax of 7.9 percent on the sale of a number of assets, including stocks, bonds and others. The capital gains tax of Inslee’s plan would not apply to retirement accounts, homes, farms and forestry. The tax would apply to earnings above $25,000 for single filers and $50,000 for joint filers. Approximately $821 million would be raised from this tax for the fiscal year of 2019.

The plan would also impose a carbon emissions tax of $25 per metric ton. This tax would raise approximately $2 billion (per year).

Also included in Inslee’s plan would be an increase to the business-and-occupation (B&O) tax for attorneys, real estate agents and other professionals. The rate would be increased from its current level of 1.5 percent to 2.5 percent. This would generate roughly $2.3 billion.

Inslee’s proposal would also eliminate multiple tax exemptions, such as the exemption on bottled water and the exemption which benefits oil refineries.

Political Reaction

Unsurprisingly, given the severity of its probable impact, Inslee’s proposal has sparked substantial criticism from lawmakers on the other side of the political spectrum. Senate Majority Leader Mark Schoesler, for instance, was quoted as saying (disapprovingly) that the proposal by Mr. Inslee would constitute the single largest state tax increase in Washington’s history. Another senator, Ann Rivers, also of the Republican Party, said she felt that Mr. Inslee’s plan appeared to be an overly aggressive solution to the issue of funding state education.

Democratic lawmakers have been more sympathetic, and it seems that Mr. Inslee will likely have full support from members of his party. Importantly, newly elected Superintendent of Public Instruction Chris Reykdal has voiced his support for the proposal and even appeared alongside Inslee during the unveiling of the plan at Lincoln High School in Tacoma.

Whether Governor Inslee’s tax plan will be enacted in its current form remains to be seen. What is certain is that the state must develop a workable plan in double quick time. The court of Washington has already held the state in contempt because of the state’s failure to supply sufficient educational funding and has ordered the state to pay hefty fines. If it wishes to avoid further consequence, the state must develop a full funding plan by September 1, 2018.